CHINA: An Introduction to Capital Markets: Hong Kong and Overseas Issuances

Major Regulation on Overseas Issuances of PRC Domestic Enterprises in 2023: Retrospective and Prospective

During 2023, the positioning of each sector of the global multi-level capital market was clearer, and the innovations from the recent string of new Connect initiatives by the Stock Exchange of Hong Kong Limited (HKEX) deepened market connectivity between China and the world. The China Securities Regulatory Commission (CSRC) and other Chinese authorities continue to develop and improve systems, laws and institutions regarding overseas issuances of domestic enterprises. The filing system for overseas issuances of domestic enterprises has been fully implemented, and issuance conditions, negative lists, and the content and format guidelines for filing materials have been unified and integrated. This provides institutional guarantees for domestic enterprises regarding use of domestic and overseas capital markets according to law, and expands and optimises the connection mechanism between domestic and overseas markets.

Overseas Capital Market: in Retrospect 

Domestic enterprises are mainly listed in Hong Kong (HK) and the United States (USA), so the overseas capital market in this article is mainly explained in the light of HK and US capital markets. A total of 73 companies were listed on the main board of HKEX in 2023, raising a total of HKD46.295 billion, a significant respective decrease of 19% and 56% compared with 2022. Listed companies are mainly distributed throughout the healthcare, food, information technology, real estate construction, media and entertainment, industry and transportation industries (among others). In 2023, HK’s shares offering continued to be slowed down by several factors, such as:

i) the Federal Reserve Board’s interest rate hike;

ii) a number of US bank failures;

iii) higher US generic ten-year yield; and

iv) the Palestinian-Israeli conflict.

According to incomplete statistics, in 2023 a total of 33 Chinese enterprises completed listing in the USA, raising a total of RMB6.1 billion, a sharp respective increase of 74% and 39% compared with 2022. Listed enterprises are mainly distributed throughout the consumer, industrial, information technology and healthcare industries. Affected by geopolitical conflicts, monetary tightening policies of major economies, investors’ cautious attitude towards risks and concerns about industry prospects, and the poor financial condition or weak performance growth of listed companies, overseas funds fled and the overseas capital market has lacked liquidity. US-listed Chinese companies have mainly comprised small and medium-sized enterprises, each generally raising less than USD50 million.

Main Considerations and Choices of Enterprises Seeking Listing

An enterprise planning to be listed should select a suitable exchange and sector based on its own business characteristics and scale, industry positioning, development stage and growth forecast. Such considerations include:

i) the positioning and industry preferences or restrictions of each sector;

ii) market capitalisation;

iii) financial requirements;

iv) the ability of each sector to raise funds;

v) listing costs;

vi) regulatory environment;

vii) refinancing conditions;

viii) the demand for refinancing as A-shares; and

ix) delisting rules.

Different jurisdictions and exchanges have different compliance requirements for enterprises seeking listing. The HK stock market requires issuers to comply with laws in a whole or significant way, without systemic risk, and may require rectification for specific matters. The US stock market requires issuers to fully disclose major compliance issues reasonably expected to affect the value of the shares or affect investors’ decisions, and related risks; and generally the regulator will not force issuers to rectify.

However, during the listing process, the PRC competent authorities may put forward corrective opinions to issuers. Red-flag issues of the HK stock market include that issuers and their directors and controlling shareholders cannot be involved in fraud, cheating or dishonest acts (such as tax evasion, corruption, bribery) and in major non-compliance incidents that make issuers unsuitable for listing.

For example, a controlling shareholder of a company with a history of bribery is required to reduce its shareholding in the issuer to less than 5%, to ensure the previous controlling shareholder will not be sufficient to exercise any material influence on any resolution of the company’s general meeting and any director or executive officer, and shall not hold any position within the issuer or participate in business operations and day-to-day management. The US stock market pays more attention to network security, data compliance and personal information protection.

Overview of the Implementation of the New Filing Rules

On 31 March 2023, the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises (the “New Filing Rules”) came into force. According to the official disclosure by the CSRC, as of 19 January 2024, 101 enterprises have obtained filing notification for their overseas offering or listing, and another 88 enterprises are still in the process of filing. Among the 101 enterprises that have completed filing, in addition to 34 enterprises seeking direct listing on the HKEX, the remaining 67 enterprises seeking indirect listing overseas include 33 enterprises seeking listing in HK and 34 enterprises seeking listing in the USA.

From their first submission of filing materials to the CSRC to completing the filing process, most enterprises (excluding enterprises only applying for full circulation of H-shares) take between two to four months. At minimum, filing took as little as 39 days (241 days at most), and took 115 days on average.

Main Regulatory Focuses of the New Filing Rules

The New Filing Rules are fully applicable to various overseas issuances of PRC domestic enterprises, including:

i) overseas direct listing, such as H-shares;

ii) overseas indirect listing;

iii) initial public offerings (IPOs);

iv) overseas multiple listing;

v) spin-off listing;

vi) listing through reverse take-over and special purpose acquisition companies;

vii) refinancing; and

viii) issuance of shares to purchase assets.

The New Filing Rules sets up certain bottom-line conditions and negative lists, but do not substantively review whether companies meet the listing conditions in overseas exchange. The CSRC will collaborate with industry competent authorities to reduce the burden on enterprises, and will not require enterprises to engage multiple authorities. The circumstances that require prior approval, if applicable, include obtaining the regulatory opinions of the industry competent authorities, and safety assessment review opinions.

The CSRC has:

i) established a filing information notification mechanism with overseas securities regulators;

ii) strengthened cross-border securities supervision and law enforcement co-operation; and

iii) actively promoted cross-border audit and supervision co-operation.

From the feedback disclosed by the CSRC, the main regulatory focuses include:

i) the shareholding control structure of red-chip companies;

ii) the variable interest entities (VIE) structure;

iii) equity changes;

iv) capital contribution;

v) shareholder verification;

vi) equity incentive plan;

vii) personal information protection and data security;

viii) foreign investment access; and

ix) business operations.

Regarding VIE, the CSRC still focuses on legal compliance in the filing management of the VIE structure, and strengthens regulatory co-ordination during the filing process. While supporting enterprises with VIE structure that meet compliance requirements to make full use of overseas markets and resources, the CSRC also actively guides their standardised development under the principles of marketisation and the rule of law. The CSRC usually requires enterprises with VIE structure to strictly implement the rectification requirements put forward by the competent authorities, such as:

i) the National Development and Reform Commission;

ii) the Ministry of Commerce; and

iii) the Ministry of Industry and Information Technology.

Regarding network security, data compliance and personal information protection, Article 9 of the New Filing Rules specifies that overseas issuance activities of domestic enterprises must strictly comply with relevant provisions on network and data security. Where safety review is involved, relevant safety review procedures should be performed according to law before submitting the application for overseas issuance. Domestic enterprises that issue and list overseas should take measures such as timely rectification, undertaking, divesting of business assets, etc, to eliminate or avoid the impact of overseas listing on national security, according to the requirements of competent authorities.

It is suggested that enterprises with overseas listing plans should introduce professional institutions timely to assist in:

i) completing network security assessment;

ii) data compliance sorting;

iii) data exit self-assessment and other related work; and

iv) handling corresponding network security review and data exit security assessment procedures, if applicable.

Overseas Capital Market: Prospects 

HKEX has been ushering in a series of strategic listing reforms since 2023, including:

i) the introduction of Chapter 18C for specialist technology companies;

ii) the GEM’s listing reform, introducing a new alternative GEM eligibility test targeting high-growth enterprises and a new streamlined transfer mechanism for eligible GEM companies to transfer to the Main Board; and

iii) the launch of four distinct initiatives in Stock Connect, which aim to enhance the attractiveness of the HK market to financing companies and investors by providing new financing options for technology companies and high-growth enterprises.

H-shares are expected to become the mainstream of overseas listing, in view of the H-shares’ IPO procedure changing from approval to filing with the CSRC, and the introduction of differentiated voting rights arrangements. Red-chip listing will secure a place in the future overseas listing market given its unique advantages. On 11 January 2024, Xinghai FANG, the vice-chairman of the CSRC, stated that the CSRC firmly promotes the opening of the capital market and will work with all parties to further improve the overseas listing mechanism, enrich issuance methods, and fully implement the New Filing Rules. This signifies the positive attitude of PRC regulatory authorities towards overseas listing.